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Enterprise Management Incentive share option schemes (or ‘EMI’ for short) have long been a useful tool for entrepreneurial fast growing companies that wish to both tie-in key employees and incentivise them tax efficiently with the promise of jam tomorrow in the form of a slice of the share equity.

The peculiar thing as evidenced from the chart above is the apparent lack of take-up by start-ups and SMEs – even ignoring the flat-lining in recent years which could be attributed to the general market malay – in that only approx 7,500 companies have an EMI scheme across the entire UK…! Which begs the question:

Is your company missing out on an EMI share option scheme?

Before going any further, its worth having a brief recap on the key tax benefits of an EMI share option scheme for qualifying companies:

No income tax or NIC cost on grant or exercise of the EMI options

Growth in shares under EMI option subject to capital gains tax (CGT) rather than dreaded income tax (45% anyone?!)

Potential for Entrepreneur’s Relief for EMI option holders even though they may ultimately hold less than the normal required 5% shareholding plus the 12 months accruing from grant of the share option (a MASSIVE recent change)

Corporation tax deduction for the company on exit in most cases.

Admittedly the entrepreneur’s relief relaxations (which I have long banged on about!) are fairly recent changes; but still, the benefits are plain to see, compared to say unapproved share options which normally have income tax and NIC written all over them…!!!

Let’s not forget that for cash-strapped start-ups and early stage companies, the ability to give highly valued employees a stake in the company with no cost outlay is a huge deal especially in the current economic climate – also, note how the company can get a tax deduction (on the increase in value between the exercise price and market value) even though the company has not incurred an expense as such!

There is also flexibility as to how and when employees can exercise the EMI share options e.g. with some being structured as ‘exit only’ options (ie the EMI options vest only minutes before a sale of the company) and /or performance criteria can be included to keep the relevant employees on their toes!

So why poor take up for EMI share schemes in the UK?

Here’s my take from experience of talking to entrepreneurs about structuring tax efficient employee remuneration planning and EMI’s in particular:

Unawareness of the scheme – sad but true, many accountants have not advised their clients that such a mechanism exists to incentivise their employees tax efficiently for both themselves and the employing company.

Too complex & costly – this is normally a misconception. Okay, the rules can be cumbersome in parts and there are some strict eligibility requirements but if you work with advisers who have implemented EMI option schemes before, this should be a problem. The costs should be far outweighed by the savings – oh, and our professional costs for setting up EMIs are tax deductible!

Bad experience in a ‘previous life’ – this can be an issue where unrealistic expectations are set when the option scheme is set-up and things don’t materialise as expected e.g. no exit occurs within the expected time-frame or if it does, the gains for the EMI optionholders turn out to be fairly paltry compared to the vision painted at the outset. Sometimes the very employees who suffered at the hands of a badly communicated EMI scheme set-up are now at the helm of their own company and are understandably fearful of inflicting the same disappointment on their own team. Managed well, this should not be an issue but it does come up…

No clear exit plan – EMI’s are designed for entrepreneurial fast growing companies and, although a company can’t have an immediate sale on the cards when it sets up the scheme, it needs to have a time-frame and clear action plan for how it will allow its employees to realise the value they hold in the paper that will turn into shares. Like point 3, we’re down to managing expectations…

This seminar aims to provide entrepreneurs and company founders with an overview of the common stumbling blocks encountered in raising EIS / SEIS fundings so that they can maximise funding opportunities and help ensure that their investors’ tax position remains protected.

You will ideally already have an understanding of the basics of EIS / SEIS, although not essential.

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Tax planning is getting a real battering at the moment – in some cases, for all the right reasons – but there are many instances where effective tax planning is essential for fast growth businesses and, in fact, positively encouraged by the government.

Aside from printing money to erode away much of our UK budget deficit (…), the Government appreciates that by encouraging entrepreneurs to build hi-tech companies here in the UK then we might have a fighting chance of seeing a brighter economic picture in the short-medium term.

To help us achieve this, the Government introduced 5 key statutory tax incentives that they absolutely and positively want entrepreneurs to claim:

As a chartered accountant specialising in advising fast growth companies in these areas – you can find plenty more about these tax incentives on this site or by getting in touch – in my view:

If all UK entrepreneurial businesses took advantage of these five statutory tax incentives (where applicable) and used the funds saved to reinvest in new jobs, new marketing channels and new business ventures; then surely we could reinvigorate our economy with fresh, innovative ip rich companies that can compete on a global scale

Enough of the ‘tax bashing’ – let’s make sure that our entrepreneurs have all of the tools necessary at their disposal if they are to get us back on top – an effective and supportive tax regime for entrepreneurs is one of them (and the good news in the UK is that – for now – we have one…).

As an ambitious entrepreneur and founder of a fast growth business you may benefit from reviewing the following generous tax breaks as part of your 2013 planning:

1. Patent box – introduced with effect from 1 April 2013, companies will be able to elect into this new beneficial company tax rate and pay tax at just 10%. This new rate of corporation tax will be phased in over a four year period.

Innovative UK companies should be taking steps now to ensure that their patents qualify and apply across the widest possible range of products and services to maximise tax savings.

2. R&D tax relief – the SME R&D tax relief continues to get better and better with the enhanced corporation tax deduction now at 225% with no de minimus spend nor PAYE cap on repayments.

3. Entrepreneur’s relief – when you come to sell the shares in your company you could benefit from this preferred rate of capital gains tax of just 10% on the first £10m of lifetime gains. You must be an officer or employee of the trading company and hold at least 5% of the ordinary shares and voting rights for the 12 months leading up to disposal of the shares to qualify.

You must ensure that the qualifying conditions are not (inadvertently) breached especially if a sale is on the cards in the foreseeable future.

4. EMI share options – the Enterprise Management Incentive share option scheme (EMI) has long been an attractive tool for retaining and incentivising key employees, however, it’s about to get even better….

It has been a long running source of frustration that the option holders struggled to satisfy the requirements of entrepreneur’s relief (ie they rarely tick the 5% share holding requirement nor the 12 month minimum holding period), however, changes are afoot to allow option holders to accrue their 12 month qualifying holding period from the date of grant and for sub 5% holdings to qualify. This promises to be a great development.

5. Seed Enterprise Investment Scheme (SEIS) – raising funding for early stage (< 2 years) trading companies is made a whole lot easier when the investors can receive a 50% income tax break on the funds invested (potentially up to 78% tax relief up until 5 April 2013)!

Companies are limited to £150,000 in total under SEIS whereas individuals have a £100,000 annual investment allowance.

These are just a handful of potentially lucrative tax breaks that should be high on your agenda if you are to release much needed cash into your business and get off to a cracking start in 2013!

A common question asked by business founders and entrepreneurs is how much of the profit generated (after paying all expenses) they should leave in the company – or put another way:

“How much should I pay myself?”

Here are two scenarios:

William pays himself enough to live off, pay the bills and take the family away for a well earned holiday abroad each year. The remainder he leaves in the company to strengthen its balance sheet and reinvest in new products, services and people as the opportunities arise (as well as protecting against a sudden unexpected ‘black swan‘ downturn in the market). William is mindful of the risk that carrying too much cash could interfere with the trading status of his company in the eyes of the tax authorities and this is kept under review by his trusted Wing-Man (his accountant).

Meanwhile, Harry strips the majority of the cash out of his business each year leaving some to protect against downturns. He works with his accountant Wing-Man to manage the tax efficient extraction of the profits to avoid any unnecessary tax leakage.

Which strategy is right?

It depends on the goals and aspirations of the founders plus the opportunity cost of either extracting or leaving the cash in the company.

As an entrepreneur you are both a wealth creator and an expert capital allocator. So you must have a plan as to the optimum way you can deploy and allocate the wealth you create for maximum future returns.

If you adopted William’s strategy and stripped most of the profits out you had better have a good plan as to how you are going to deploy that cash to get the best return on your capital. For example, are you going to invest in new ventures, back some promising entrepreneurs as a business angel (SEIS might be of interest?) or perhaps invest in property?

Leaving the cash on deposit in your current account is not a good strategy.

On the other hand, if right now you see plenty of opportunities to get a good return on your capital in the business then leave it in there and take some small bets on new products, services or other initiatives and build from there.

Back to the question and answer: it depends.

There is no definitive answer as it depends on a number of factors including:

your goals

where your business is up to in its lifecycle

what opportunities exist inside your business

what opportunities exist outside your business

Always good to discuss your personal strategy with a trusty Wing-Man….

What is it that makes some businesses far more successful than others?

In the years I have worked with successful fast growth companies I have seen the following traits displayed by each of them

1. Think BIG

These highly successful fast growth companies may start out small but they think big from day one. This may be evident from their aggressive growth targets; their fearlessness in competing against companies 100 x bigger than them; or how they organise themselves internally with CEO, CFO, CMO etc titles.

2. Cover bands don’t change the world

Their mission is crystal clear. They know what they want to achieve even if they’re not exactly sure how they will make it happen – yet. To be another “me-too” business is not an option. The mission is sometimes disruptive in existing markets; sometimes a new slant on existing markets or other times striking out into completely new blue ocean markets. Having a clear mission that cascades throughout the organisation allows for decisions to be made quickly: “Does this move us closer to our mission / goal / objective – Yes or No?”

3. Give me a lever long enough and I’ll move the world

The business must be scalable if it is to continue on its growth trajectory without sacrificing the majority of its profit margin on more people, materials etc. Achieving scalability is different from business to business but every successful business has a plan for profitable scalable growth.

4. Clients’ interests are always put 1st

No matter what internal protocol says, if a client is unhappy they will go the extra mile to put it right. There is no navel gazing. They treat every client like it is their only client. I use the word ‘client’ rather than ‘customer’ deliberately – a customer may be viewed as transactional – a ‘one-off’ – whereas a client is a long-term relationship. These successful companies want clients.

5. No need for corporate values charts

Every member of the team is an embodiment of the culture of the organisation in the way in which they act every day. I am not sure if this stems from the fact that the founder(s) of the business are directly involved in the recruitment of new staff in the early stages and therefore recruit only those who understand and resonate with the mission of the business? Whichever, it works as you will often hear clients or suppliers reflect “Where did they find staff like that? They were so keen, so helpful, so eager to please – it was a pleasure working with them”.

6. Invest in many small bets

They know that if they are to grow and respond to changing market needs they will need to take risks and try new stuff. Trying new stuff costs time and money. Staking the future of the business on 1 new idea, product or service is folly – the walls can crumble in an instant if the project fails. So rather than sit tight and do nothing, these highly successful businesses try lots of little projects and test them with the market. If the feedback is positive (and cash is being received) then they can invest little by little into these little bets until they have a fully fledged new offering.

7. Dynamism is built into their DNA

It seems like there is a constant feedback loop going on in the business. Client-facing team members share successes and failures internally with lightening speed. Advances in technology allow these businesses to observe and listen to client needs. Tweaks to products and/or services are made on a daily basis. There is no standing still. Ever.

Pitching for Management is a live event series which runs in 18 cities across the UK. It will be held at Brown Shipley’s offices in Spinningfields from 4.00pm to 7.30pm. As well as the pitches there are plenty of networking opportunities at the event and canapés and drinks will be served during the evening.

The Pitching for Management concept is simple. Make a short pitch to an audience of senior executives who have come to see if they can offer their services to help you.

These executives are willing to work for sweat equity, bonuses, commissions and/or share options. So pitching companies do not need to pay high salaries until they are delivering the results you require.

You can read all about Pitching for Management at www.pitching4management.com.

We are expecting between 30 – 50 relevant senior executives will attend the event. Past events in the series have shown that pitching companies have a good chance of finding someone that suits.

AngelNews is holding a competition for the best pitch of this series of Pitching for Management. The winning pitch at the Manchester event will go through to the final in Bristol on 13th December. The winner of the final will receive a £2,000 cheque.

To find out more about this opportunity, please call Caroline Sage at AngelNews on 01761 452 248 or email her on caroline[at]angelnews.co[dot]uk or contact me.